Buy 'Em out - a New Strategy for Cutting Government

Monday, October 31, 2016

If you were looking for serious policy discussion, the 2016 election has been a massive disappointment. As revealed during the debates and in their many public statements, neither Hillary Clinton nor Donald Trump has a plan for addressing the public sector’s biggest problem: government has become so large that it is unmanageable and ineffective.

In 1930, total government expenditure was 10% of GDP. Of that, approximately 3% was federal spending, and 7% was state and local spending. Today, government expenditure is about 40% of GDP, with 25% of that spending federal, and the remaining 15% state and local.

Government has gotten much larger, as well as significantly more removed from ordinary citizens. The concentration of power at the federal level weakens democratic checks on politicians and bureaucrats, who are freed to use tax revenues to advance their narrow interests, rather than those of the nation. The only way to fix this problem is to restore limited government and strict federalism, as envisioned by the 9th and 10th Amendments to the US Constitution.

A Massive Thicket

There exists space between private and national payoffs for political entrepreneurs to arrange mutually beneficial bargains.

Many federal programs must be retired.

The problem is that a massive web of politicians, bureaucrats, and interest groups stand in the way of shrinking government back to a manageable scale. Voters like smaller and more local government—and hence a lower tax bill—in the abstract. But special interests oppose it, each on their specific issue.

The result is a classic ‘concentrated benefits, dispersed costs’ problem. Each interest group will fight hard to protect its privileges. Voters would be happy in the aggregate to end political patronage, but individually it’s too costly for them to do so. The result is runaway government, with taxpayers footing the bill.

Because of this, many proposals to shrink government are dead on arrival. But there’s one that hasn’t been tried, which will work for voters and political insiders both. In brief, taxpayers can buy out special interests.

The Buyout Strategy

The theoretical groundwork for this strategy has already been laid. Nobel laureate James Buchanan wrote a scholarly article titled, “Positive Economics, Welfare Economics, and Political Economy,” in which he argued that the only way to ‘test’ whether policy proposals are welfare enhancing is if the interested parties, private and public, consent to the proposals. This means any program to shrink the state has to get the consent of those currently benefiting from state policy, even if that policy is bad for the nation as a whole. Fortunately, there exists space between private and national payoffs for political entrepreneurs to arrange mutually beneficial bargains. In particular, it would be in the interests of taxpayers and political insiders both if taxpayers paid insiders simply to stop doing what they’re doing.

Consider economists’ favorite example of political inefficiency: agricultural subsidies. Economists are virtually unanimous in claiming there is no socially beneficial aspect of agricultural subsidies. In fact, such subsidies are socially costly, because they direct resources towards the promotion of products that the market has deemed less valuable. It would be both in taxpayers’ and agricultural producers’ interests if the following deal were struck: keep paying agricultural producers the full amount of the subsidy, in dollars, whether they stay in the industry or not.

This is a windfall gain for agricultural producers. Before, they only got the money if they made agricultural products. Now they get the money without any strings attached. Many will use this as an opportunity to get out of the business and do something else. Perhaps some will simply retire. But this whole arrangement is good for citizens.

The only way to deal with government bloat is to recognize political insiders are not going to forego their privileges without compensation.

The social costs of agricultural subsidies lies not in the money changing hands, but in the political distortion of resource allocation. Now that the cash transfer is without condition, agricultural producers no longer have an incentive to continue supplying output that the market has deemed lower-valued than cost. Ordinary citizens are better off, because subsidies are no longer destroying wealth. Agricultural producers are also better off, because they get the cash value of the subsidies irrespective of how much they produce. Everybody wins, and in terms of economic efficiency, the nation is wealthier.

More and More Buy Outs

Policies like this can be tinkered with in order to sweeten the deal for taxpayers. For example, continue paying the full subsidies for ten years, and then phase them out over the following ten. Since without this program, the subsidies would probably have continued in perpetuity, the policy will also be deficit-reducing in addition to wealth-enhancing.

The ‘buy them out’ proposal provides a general framework for reducing wasteful government activity on all margins. It can be applied to multiple issues: healthcare, education, even entitlement reform can be addressed by making mutually agreeable buyouts. The logic holds, whatever the specific application: these proposals will be windfall gains for political insiders, will reduce the government’s bill for ordinary taxpayers, and facilitate a more efficient allocation of the nation’s scarce resources.

Grand overhauls of public policy must take the status quo as given. The only way to deal with government bloat is to recognize political insiders are not going to forego their privileges without compensation. Taxpayers, working through their elected representatives, can and should buy out these insiders. Doing so may be the only incentive-compatible path back towards more local, responsive, and effective government.

Alexander William Salter is an Assistant Professor of Economics in the Rawls College of Business, and the Comparative Economics Research Fellow at the Free Market Institute, both at Texas Tech University.